What do we really know about income inequality? A fair analysis of the chart at right, taken from an essay by Brooking’s Scott Winship in the new issue of National Affairs and combining data from various sources, leads to the following observations about US income growth and inequality since World War Two:

1. Purchasing power has grown for lower, middle, and high income earners across business cycles, though more slowly overall in the past generation than during the immediate postwar boom. (Here’s why we can’t go back to the 1950s, and how the US growth slowdown has been misinterpreted.)

2. Inequality between the poor and middle class increased or decline modestly during all these periods, except the 1980s.

3. High-end inequality has risen dramatically.

Now the core question Winship asks is, basically, “Is income inequality hurting America?” A review of the academic literature and his own new research leads Winship to conclude “the liberal narrative of inequality as a driver of our social and economic woes is not nearly firm enough to support the political and policy arguments now often built upon it.”

It’s a long essay definitely worth a full read, so let me just point out three things

First, as the chart indicates, high-end inequality has not led to income stagnation. But would less inequality mean even stronger income growth? Winship cites forthcoming work by University of Arizona sociologist Lane Kenworthy which “finds that increases in inequality may lower median incomes somewhat. But when he allows for the possibility that inequality might increase economic growth rates and lead to greater government redistribution, the effect disappears.”

Second, it’s also seems doubtful that inequality is much reducing income mobility, if at all. Winship recently completed new research that finds men born in the early 1980s have experienced, at most, “only a bit less mobility” than those born in the 1950s.

Among those raised in the bottom quarter of the family-income distribution, the fraction escaping the bottom fourth of earnings as adults fell from 63% to 60%, a decline too small to be reliably different from zero. In fact, they may have experienced greater mobility than men born in the early 1960s, when only 54% escaped the bottom fourth.

In other words, when it comes to the purported relationship between inequality and “declining opportunity,” the problem may not be insufficiently rigorous explanation. Rather, it could be that there is no decline that needs explaining in the first place. Perhaps this is why leading mobility researcher Michael Hout, a Berkeley sociologist, concluded in 2004, “[The] literature to date has offered surprisingly little evidence that links intergenerational difference and persistence (mobility and immobility) to economic or other inequality.”

Third, while income inequality gets blamed for all sorts of social ills, from the increase in teen pregnancy to the widening education gap between poor kids and rich kids, proving causality is tricky. Winship:

A better approach to testing hypotheses about inequality and opportunity is to look not at snapshots of both in a few countries, or at how both evolved in a single country, but rather to test whether any relationships between inequality and opportunity hold as both indicators change across geographies. This strategy has been pursued in ongoing research by Kenworthy, who concludes that rising inequality probably has not lowered college-graduation rates, increased single parenthood, or pushed up murder rates (though it may have had small effects on life expectancy and infant mortality)

So what are the public policy implications of Winship’s essay? As the author rightly notes, you can question the linkages between income inequality and various problems while still working to improve economic growth, healthcare access, education, and economic mobility. But a knee-jerk. emotional response to the rise in inequality could lead to rash policy decisions, such as cranking up marginal tax rates or further penalizing investment income.

That’s my bottom line. Here is Winship’s: “There is simply very little evidence to suggest that, within the range of inequality that modern countries have experienced and the range seen in our country over the past century, income disparities between the rich, middle class, and poor merit the intense attention lavished on them by the left.”

There are 17 comments.

Thank you, James, for addressing this issue — and glad to see you posted it at Ricochet as well as at AEI (mostly because the comments over here will almost certainly be more instructive, and I look forward to the reactions of the Ricochetti). Although I hear much sound and fury from the left about the problem of income inequality, I have yet to understand why it’s a crisis that government has to solve.

This is a great point – I’ve read other works on this aspect of it, where essentially transfers and other benefits aren’t counted. Although I’m assuming that progressives would likely think that this is a good thing, and we should do more of it.

Jay Bhattacharya: One major problem with nearly all published calculations of income inequality (including the most prominent ones by people like Piketty and Saez) is that they do not count the actuarial value of health insurance (or other benefits) in their calculations. They also do not count the value of government transfers (welfare). When these are accounted for, income inequality looks a lot better than progressives are willing to let on. Here’s a nice paper by Kosali Simon and Richard Burkhauser that makes this point. · 7 hours ago

I used to think it was simple economic ignorance, willful or not, that drove the idea of throwing money at the problem. If someone is poor, living in assisted housing, has a child, and the gov’t is paying for the housing, the food, the phone, the health care, I have a hard time understanding why anyone would find an incentive to change anything, not a thing, ever.

There really shouldn’t be any confusion over why we have lifetime dependencies, and inter-generational dependencies. Behaviors tend not to change unless people absolutely have to – and even then, behavior becomes so ingrained that rationalizations and stubbornness (and fear) will prevent most people from making a critical life change.

Tim Fikse:

If poverty is the exclusive source of every social malady, then wealth redistribution is the solution to those maladies. It’s a lot easier–and politically rewarding–to attack poverty by transferring money to poor people than it is to address the pathologies that actually trap people in the underclass. · 6 hours ago

A more cynical view would hold that progressives don’t really care about the poor, other than in the abstract, and rather see income inequality as a lever to use in the expansion of the gov’t.

If all incomes become equal, then the gov’t will have gone to the place where each of us is allocated income not to their ability, but “to our need”. I thought the 100 million or so dead in the 20th century under that way of thinking might be evidence enough that This Is Stupid.

Dependency truly appeals to the darkest urges, whether the dependent understands that or not. Dependency ensures that real freedom, freedom of thought, expression, choice, etc., is never seen, and so cannot even be contemplated. When all you know is one thing, the world becomes quite limited.

As you note, the real metric to be concerned about is not the differences in aggregate wealth within defined zones/percentages, it’s the ability to move between them that indicates both the opportunity and the willingness to work for more.

That’s why the left loves snapshots, because it doesn’t show mobility. Is a college student forever stuck in the same percentile because they schlep dishes at a restaurant for 2 years? No, and neither is anyone else who’s willing to work, go to school (or go back to school), or most often, both.

The income inequality line is just re-distribution with another name slapped on it. It sounds good, because it sounds unfair. But ask anyone on the street whether or not they think they should make more than some of their co-workers at work, and you’ll get an earful as to how much more this person wants their income to be more unequal relative to other people. In other words, they want more income.

Income inequality creates a gradient that incentivizes people to move from one income group to another. Income equality is yet one more of those good things that creates prosperity but that the “caring” set doesn’t want to hear about or willfully won’t understand. They would just rather give you the fish and call it even.

…But a knee-jerk. emotional response to the rise in inequality could lead to rash policy decisions, such as cranking up marginal tax rates or further penalizing investment income.

That’s my bottom line.

Yeah, this is all true. Here’s the problem: you haven’t addressed -at all- why the Left obsesses over income inequality.

Short answer: it garners votes.

To wit, Winship misses the point here:

There is simply very little evidence to suggest that, within the range of inequality that modern countries have experienced and the range seen in our country over the past century, income disparities between the rich, middle class, and poor merit the intense attention lavished on them by the left.

I’m overstating a bit, there are libs who think it’s a big problem. These being the economic egalitarians as opposed to the social egalitarians (like Mickey Kaus) in their coalition.

Nevertheless, when we take their “concerns” at face value we do ourselves a disservice.

Obviously, the left waxes hyperbolic over income inequality. I still think it’s worth thinking about. My general thought is that inequality has no moral significance *per se*, but virtually always precipitates many socially and morally significant consequences. That being the case, we should always be *concerned* about it, though of course we shouldn’t assume that our concern need translate into, say, a top-down government intervention.

I have lots of ideas on this, but here’s just one. Above, it is claimed that income mobility has decreased only a small amount. Conservatives love to assume that such mobility as there is reflects hard work and good decision-making. What if it doesn’t?

Here are a couple of other scenarios. Suppose that income equality reflects (to a much greater degree than in most previous eras) differences in native talent. Suppose further that one of the ways we filter out this economically-valuable talent is by urging a large percentage of the population through a lengthy filtering process, with prosperity dangled before them as an incentive for “winning”. The lives of the losers aren’t really that bad, but naturally they feel a little sore about it all. (cont)

…But a knee-jerk. emotional response to the rise in inequality could lead to rash policy decisions, such as cranking up marginal tax rates or further penalizing investment income.

That’s my bottom line.

Yeah, this is all true. Here’s the problem: you haven’t addressed -at all-whythe Left obsesses over income inequality.

I would put income inequality into a whole group of economic issues that assuage the left’s “caring” cravings (this is why they obsess over it because they care and we don’t – it’s not fair that some people have more than other people), but in actual fact hurt everyone, especially the poor:

Here’s another, even less inspiring scenario: suppose that “winning” the income lottery reflected some less laudable character traits than hard-workingness and entrepreneurial spirit. Suppose that neglecting family, avoiding personal obligations of other kinds, and perhaps succumbing to pressures to be complicit in dishonesty and corruption, all make it far more likely that a person will get ahead. Now even more, people are going to feel fairly bitter about the things they lost through their integrity and responsible decision-making.

Neither of these scenarios would justify a knee-jerk response such as massive wealth redistribution. But if there’s any truth in them at all (and I think there probably is, particularly in the first) then a party looking to win more votes should come up with something better than “BAH!!!” to say in response. Inequality isn’t per se bad, but it always tells us a lot about what sort of society we have; resentment about inequality also tells us a lot. It’s great that our economists are helping us make sense of that side of things, but I don’t think the take-home message should be “no cause for concern, go about your business.”

One major problem with nearly all published calculations of income inequality (including the most prominent ones by people like Piketty and Saez) is that they do not count the actuarial value of health insurance (or other benefits) in their calculations. They also do not count the value of government transfers (welfare). When these are accounted for, income inequality looks a lot better than progressives are willing to let on. Here’s a nice paper by Kosali Simon and Richard Burkhauser that makes this point.

OK, let’s change the nomenclature a bit. Instead of calling it “income inequality”, how about “EARNINGS inequality”. Income inequality carries the implicit assumption that the people who have “income” are passive receivers of funds, for which they do not necessarily do any work. Earnings, are just that, earned. I totally agree that the fact that some people earn more than others should be an incentive for the lower-earner to increase his ability to earn, by going to school or getting work experience. What the Liberals want to do is destroy that incentive by lowering the amount that the higher-earners can earn. Why do any self-improvement, if it only increases your income by a small amount? We Conservatives want everyone to be able to become rich!

I think the greatest reason for the left’s wailing and gnashing of teeth about income inequality is that it allows them to discount other, more practical solutions to poverty, especially if identifying those solutions generates uncomfortable value judgments.

If poverty is the exclusive source of every social malady, then wealth redistribution is the solution to those maladies. It’s a lot easier–and politically rewarding–to attack poverty by transferring money to poor people than it is to address the pathologies that actually trap people in the underclass.

Jay Bhattacharya: One major problem with nearly all published calculations of income inequality (including the most prominent ones by people like Piketty and Saez) is that they do not count the actuarial value of health insurance (or other benefits) in their calculations. They also do not count the value of government transfers (welfare). When these are accounted for, income inequality looks a lot better than progressives are willing to let on. Here’s a nice paper by Kosali Simon and Richard Burkhauser that makes this point. · 15 hours ago

The typical number quoted for income growth has been just 3.2% over the last three (nearly four) decades – but that analysis ignores all of the government interventions over that time period. The real number is 36.7% – which, given the proliferation of electronic gadgets in my house sounds about right.